Euro zone businesses end first quarter on brighter note

Published 10:11 AM ET Tue, 22 March 2016
CNBC.com

Business activity in the euro zone and sentiment in powerhouse Germany ended the first quarter on a brighter note, surveys showed on Tuesday, suggesting the European Central Bank's extra stimulus may already be having a positive effect.

The ECB chopped interest rates again and bolstered its asset purchase programme earlier this month as part of an ongoing battle to drive up growth and inflation in the 19-nation bloc.

Markit's flash composite Purchasing Managers' Index (PMI) regarded as a good growth indicator, jumped to 53.7 this month from February's 53.0, which was the lowest reading since the start of 2015.

Krisztian Bocsi/Bloomberg via Getty Images

n employee inspects a truck axle hanging on the assembly line inside the MAN SE factory in Germany.

The latest result was above all forecasts in a Reuters poll, which had a median prediction of 53.0. Any reading above 50 denotes growth.

Markit said the PMI pointed to first quarter GDP growth of 0.3 percent, slightly weaker than a Reuters poll prediction earlier this month of 0.4 percent.

Sister surveys from Germany and France, the bloc's two biggest economies, showed the growth rate held steady in the former and was at a five-month high in the latter.

"The surveys offer some encouragement that activity and sentiment have improved somewhat as fears about the global economy have eased," said Jennifer McKeown at Capital Economics.

German business morale rose more than expected in March, snapping a three-month run of falls as companies' assessments of both the current situation and the outlook improved, Munich-based Ifo economic institute said on Tuesday.

The mood among German analysts and investors also rose in March, albeit not by as much as expected, a survey by think tank ZEW showed.

Still, European stocks fell and investors rushed for the safety of gold and government bonds on Tuesday, after two explosions at Brussels airport and blasts at metro stations in the Belgian capital overshadowed the data.

Weak Underbelly

What hasn't revived yet in the euro zone is company pricing power. As they have for all but two months in the last four years, firms cut prices to stimulate trade and the output price index only nudged up to 48.6 from 48.5.

Euro zone inflation was -0.2 percent in February, nowhere near the ECB's target of close to but just under 2 percent.

In Britain, which does not use the euro, inflation held steady at 0.3 percent in February, official data showed on Tuesday, putting no pressure on the Bank of England to raise interest rates from record lows anytime soon.

A PMI covering the bloc's dominant service industry also came in above expectations for no change from February's 13-month low of 53.3. It jumped to 54.0, matching the most optimistic forecast in a Reuters poll.

But some of the activity was driven by the running down of old orders. A backlogs of work index slipped below 50 for the first time since May, dipping to 49.8 from last month's break-even point.

Manufacturers also had a better month than expected for the euro zone. The factory PMI rose to 51.4 from February's one-year low of 51.2, just pipping the 51.3 median forecast. An output index, which feeds into the composite PMI, climbed to 52.7 from 52.3.

But suggesting April may see little improvement, factories barely increased headcount this month. The employment sub-index fell to 50.5 from 51.0, its lowest reading since late-2014.

That, said Apolline Menut at Barclays, meant Tuesday's numbers might not be a positive as they appear.

"Today's PMI headlines are quite misleading as they paint a more upbeat picture than the details suggest: weak external demand remains a drag on confidence, weighing on firms' hiring intentions, while deflationary pressures are still at play," Menut said.